Download Risk Factors A number of risk factors affect Prudential`s operating

Risk Factors
A number of risk factors affect Prudential’s operating results and financial condition and, accordingly, the trading
price of its shares. The risk factors mentioned below should not be regarded as a complete and comprehensive
statement of all potential risks and uncertainties. The information given is as of the date of this document, and
any forward-looking statements are made subject to the reservations specified below under ‘Forward-Looking
Statements’.
Prudential’s approaches to managing risks are explained in the “Group Chief Risk Officer’s report on the risks
facing our business and our capital strength” section of this document.
Risks relating to Prudential’s business
Prudential’s businesses are inherently subject to market fluctuations and general economic conditions
Prudential’s businesses are inherently subject to market fluctuations and general economic conditions.
Uncertainty or negative trends in international economic and investment climates could adversely affect
Prudential’s business and profitability. Since 2008 Prudential has operated against a challenging background of
periods of significant volatility in global capital and equity markets, interest rates (which in some jurisdictions have
become negative) and liquidity, and widespread economic uncertainty. For example, government interest rates
remain at or near historic lows in the US, the UK and some Asian countries in which Prudential operates. These
factors have, at times during this period, had a material adverse effect on Prudential’s business and profitability.
In the future, the adverse effects of such factors would be felt principally through the following items:
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investment impairments or reduced investment returns, which could reduce Prudential’s capital and impair
its ability to write significant volumes of new business, increase the potential adverse impact of product
guarantees, or have a negative impact on its assets under management and profit;
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higher credit defaults and wider credit and liquidity spreads resulting in realised and unrealised credit
losses;
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failure of counterparties to transactions with Prudential that could give rise to a negative impact on
Prudential’s financial position and on the accessibility or recoverability of amounts due or, for derivative
transactions, adequate collateral not being in place;
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estimates of the value of financial instruments being difficult because in certain illiquid or closed markets,
determining the value at which financial instruments can be realised is highly subjective. Processes to
ascertain such values require substantial elements of judgement, assumptions and estimates (which may
change over time); and
•
increased illiquidity also adds to uncertainty over the accessibility of financial resources and may reduce
capital resources as valuations decline.
Global financial markets are subject to uncertainty and volatility created by a variety of factors, including concerns
over sovereign debt, general slowing in world growth, the timing and scale of quantitative easing programmes of
central banks and socio-political events. Upheavals in the financial markets may affect general levels of
economic activity, employment and customer behaviour. For example, insurers may experience an elevated
incidence of claims, lapses, or surrenders of policies, and some policyholders may choose to defer or stop paying
insurance premiums. The demand for insurance products may also be adversely affected. In addition, there may
be a higher incidence of counterparty failures. If sustained, this environment is likely to have a negative impact on
the insurance sector over time and may consequently have a negative impact on Prudential’s business and its
balance sheet and profitability. For example, this could occur if the recoverable value of intangible assets for
bancassurance agreements and deferred acquisition costs are reduced. New challenges related to market
fluctuations and general economic conditions may continue to emerge.
For some non-unit-linked investment products, in particular those written in some of the Group’s Asian
operations, it may not be possible to hold assets which will provide cash flows to match those relating to
policyholder liabilities. This is particularly true in those countries where bond markets are not developed and in
certain markets where regulated surrender values are set with reference to the interest rate environment
prevailing at the time of policy issue. This results in a mismatch due to the duration and uncertainty of the liability
cash flows and the lack of sufficient assets of a suitable duration. While this residual asset/liability mismatch risk
can be managed, it cannot be eliminated. Where interest rates in these markets remain lower than those used to
calculate surrender values over a sustained period, this could have a material adverse effect on Prudential’s
reported profit.
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In the US, fluctuations in prevailing interest rates can affect results from Jackson which has a significant
spread-based business, with the majority of its assets invested in fixed income securities. In particular, fixed
annuities and stable value products written by Jackson expose Prudential to the risk that changes in interest
rates, which are not fully reflected in the interest rates credited to customers, will reduce spread. The spread is
the difference between the rate of return Jackson is able to earn on the assets backing the policyholders’
liabilities and the amounts that are credited to policyholders in the form of benefit increases, subject to minimum
crediting rates. Declines in spread from these products or other spread businesses that Jackson conducts, and
increases in surrenders levels arising from interest rate rises, could have a material impact on its businesses or
results of operations.
Jackson also writes a significant amount of variable annuities that offer capital or income protection guarantees.
The value of these guarantees is affected by market factors (such as interest rates, equity values, bond spreads
and realised volatility) and policyholder behaviour. There could be market circumstances where the derivatives
that Jackson enters into to hedge its market risks may not fully cover its exposures under the guarantees. The
cost of the guarantees that remain unhedged will also affect Prudential’s results.
Jackson hedges the guarantees on its variable annuity book on an economic basis and, thus, accepts variability
in its accounting results in the short term in order to achieve the appropriate economic result. In particular, for
Prudential’s Group IFRS reporting, the measurement of the Jackson variable annuity guarantees is typically less
sensitive to market movements than for the corresponding hedging derivatives, which are held at market value.
However, depending on the level of hedging conducted regarding a particular risk type, certain market
movements can drive volatility in the economic results which may be less significant under IFRS reporting.
A significant part of the profit from Prudential’s UK insurance operations is related to bonuses for policyholders
declared on with-profits products, which are broadly based on historical and current rates of return on equity, real
estate and fixed income securities, as well as Prudential’s expectations of future investment returns. This profit
could be lower in a sustained low interest rate environment.
Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of
sovereign debt obligations held in its investment portfolio
Prudential is subject to the risk of potential sovereign debt credit deterioration on the amounts of sovereign debt
obligations held in its investment portfolio. In recent years, rating agencies have downgraded the sovereign debt
of some countries. There is a risk of further downgrades.
Investing in sovereign debt creates exposure to the direct or indirect consequences of political, social or
economic changes (including changes in governments, heads of states or monarchs) in the countries in which
the issuers are located and the creditworthiness of the sovereign. Investment in sovereign debt obligations
involves risks not present in debt obligations of corporate issuers. In addition, the issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or
pay interest when due in accordance with the terms of such debt, and Prudential may have limited recourse to
compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay
interest in a timely manner may be affected by, among other factors, its cash flow situation, its relations with its
central bank, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date
a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s
policy toward local and international lenders, and the political constraints to which the sovereign debtor may be
subject.
Moreover, governments may use a variety of techniques, such as intervention by their central banks or imposition
of regulatory controls or taxes, to devalue their currencies’ exchange rates, or may adopt monetary and other
policies (including to manage their debt burdens) that have a similar effect, all of which could adversely impact
the value of an investment in sovereign debt even in the absence of a technical default. Periods of economic
uncertainty may affect the volatility of market prices of sovereign debt to a greater extent than the volatility
inherent in debt obligations of other types of issuers.
In addition, if a sovereign default or other such events described above were to occur, other financial institutions
may also suffer losses or experience solvency or other concerns, and Prudential might face additional risks
relating to any debt of such financial institutions held in its investment portfolio. There is also risk that public
perceptions about the stability and creditworthiness of financial institutions and the financial sector generally
might be affected, as might counter party relationships between financial institutions. If a sovereign were to
default on its obligations, or adopt policies that devalue or otherwise alter the currencies in which its obligations
are denominated this could have a material adverse effect on Prudential’s financial condition and results of
operations.
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Prudential is subject to the risk of exchange rate fluctuations owing to the geographical diversity of its
businesses
Due to the geographical diversity of Prudential’s businesses, Prudential is subject to the risk of exchange rate
fluctuations. Prudential’s operations in the US and Asia, which represent a significant proportion of operating
profit based on longer-term investment returns and shareholders’ funds, generally write policies and invest in
assets denominated in local currencies. Although this practice limits the effect of exchange rate fluctuations on
local operating results, it can lead to significant fluctuations in Prudential’s consolidated financial statements upon
translation of results into pounds sterling. This exposure is not currently separately managed. The currency
exposure relating to the translation of reported earnings could impact on financial reporting ratios such as
dividend cover, which is calculated as operating profit after tax on an IFRS basis, divided by the current year
interim dividend plus the proposed final dividend. The impact of gains or losses on currency translations is
recorded as a component of shareholders’ funds within other comprehensive income. Consequently, this could
impact on Prudential’s gearing ratios (defined as debt over debt plus shareholders’ funds). The Group’s surplus
capital position for regulatory reporting purposes may also be affected by fluctuations in exchange rates with
possible consequences for the degree of flexibility the Prudential has in managing its business.
Prudential conducts its businesses subject to regulation and associated regulatory risks, including the
effects of changes in the laws, regulations, policies and interpretations and any accounting standards in
the markets in which it operates
Changes in government policy, legislation (including tax) or regulatory interpretation applying to companies in the
financial services and insurance industries in any of the markets in which Prudential operates, which in some
circumstances may be applied retrospectively, may adversely affect Prudential’s product range, distribution
channels, competitiveness, profitability, capital requirements and, consequently, reported results and financing
requirements. Also, regulators in jurisdictions in which Prudential operates may change the level of capital
required to be held by individual businesses or could introduce possible changes in the regulatory framework for
pension arrangements and policies, the regulation of selling practices and solvency requirements. In addition,
there could be changes to the maximum level of non-domestic ownership by foreign companies in certain
jurisdictions. Furthermore, as a result of interventions by governments in response to recent financial and global
economic conditions, it is widely expected that there will continue to be a substantial increase in government
regulation and supervision of the financial services industry, including the possibility of higher capital
requirements, restrictions on certain types of transactions and enhanced supervisory powers.
Current EU directives, including the EU Insurance Groups Directive (IGD) require EU financial services groups to
demonstrate net aggregate surplus capital in excess of solvency requirements at the group level in respect of
shareholder-owned entities. The test is a continuous requirement, so that Prudential needs to maintain a higher
amount of regulatory capital at the group level than otherwise necessary in respect of some of its individual
businesses to accommodate, for example, short-term movements in global foreign exchange rates, interest rates,
deterioration in credit quality and equity markets. The EU is also developing a new prudential regulatory
framework for insurance companies, referred to as ‘Solvency II’.
The Solvency II Directive covers valuation, the treatment of insurance groups, the definition of capital and the
overall level of capital requirements. A key aspect of Solvency II is that the assessment of risks and capital
requirements are intended to be aligned more closely with economic capital methodologies, and may allow
Prudential to make use of its internal capital models, if approved by the Prudential Regulation Authority (PRA).
The Solvency II Directive was formally approved by the Economic and Financial Affairs Council in November
2009 and the Omnibus II Directive, which amended certain aspects of the Solvency II Directive, was adopted by
the Council of the European Union in April 2014. As such, Solvency II is expected to be implemented as of 1
January 2016, although the European Commission and the European Insurance and Occupational Pensions
Authority (EIOPA) are continuing to develop the detailed rules and guidelines that will supplement the high-level
rules and principles of the Solvency II and Omnibus II Directives, including the Delegated Acts relating to thirdcountry equivalence. These detailed rules and guidelines are not currently expected to be finalised until mid to
late 2015. Further, the effective application of a number of key measures incorporated in the Omnibus II
Directive, including the provisions for third-country equivalence, is subject to supervisory judgement and
approval. As a result there is a risk that the effect of the measures finally adopted could be adverse for
Prudential, including potentially a significant increase in the capital required to support its business and that
Prudential may be placed at a competitive disadvantage to other European and non-European financial services
groups.
Currently there are also a number of other global regulatory developments which could impact the way in which
Prudential is supervised in its many jurisdictions. These include the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) in the US, the work of the Financial Stability Board (FSB) on Global
Systemically Important Insurers (G-SIIs) and the Common Framework for the Supervision of Internationally
Active Insurance Groups (ComFrame) being developed by the International Association of Insurance Supervisors
(IAIS).
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The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United
States that, among other reforms to financial services entities, products and markets, may subject financial
institutions designated as systemically important to heightened prudential and other requirements intended to
prevent or mitigate the impact of future disruptions in the US financial system. The full impact of the Dodd-Frank
Act on Prudential’s businesses is not currently clear, as many of its provisions have a delayed effectiveness
and/or require rulemaking or other actions by various US regulators over the coming years.
In July 2013 the FSB announced the initial list of nine insurance groups that have been designated as G-SIIs of
which Prudential was one. Designation as a G-SII has led to additional policy measures being applied to the
designated group. Based on the policy framework released by the IAIS and subsequent guidance papers these
additional policy measures include enhanced group- wide supervision, effective resolution measures of the group
in the event of failure, loss absorption, and higher loss absorption capacity. Prudential is monitoring the
development and potential impact of, the framework of policy measures and is continuing to engage with the PRA
on the implications of the policy measures and Prudential’s designation as a G-SII. The G-SII regime also
introduces two types of capital requirements; the first, a Basic Capital Requirement (BCR), designed to act as a
minimum group capital requirement and the second, a Higher Loss Absorption (HLA) requirement that should
reflect the drivers of the assessment of G-SII designation. G-SIIs will be required to report on their BCR to groupwide supervisors on a confidential basis from 2015. The HLA requirement will apply from January 2019 to the
insurance groups identified as G-SIIs in November 2017.
ComFrame is also being developed by the IAIS to provide common global requirements for the supervision of
insurance groups. The framework is designed to outline a set of common global principles and standards for
group supervision and may increase the focus of regulators in some jurisdictions. One of the framework’s key
components is an Insurance Capital Standard (ICS) which would be expected to form the group solvency capital
standard under ComFrame. This new framework is expected to be implemented in 2019.
Various jurisdictions in which Prudential operates have created investor compensation schemes that require
mandatory contributions from market participants in some instances in the event of a failure of a market
participant. As a major participant in the majority of its chosen markets, circumstances could arise where
Prudential, along with other companies, may be required to make such contributions.
The Group’s accounts are prepared in accordance with current International Financial Reporting Standards
(IFRS) applicable to the insurance industry. The International Accounting Standards Board (IASB) introduced a
framework that it described as Phase I, which permitted insurers to continue to use the statutory basis of
accounting for insurance assets and liabilities that existed in their jurisdictions prior to January 2005. In July
2010, the IASB published its first Exposure Draft for its Phase II on insurance accounting, which would introduce
significant changes to the statutory reporting of insurance entities that prepare accounts according to IFRS. A
revised Exposure Draft was issued in June 2013. The IASB is currently re-deliberating the Exposure Draft
proposals in light of comments by the insurance industry and other respondents. The timing of the final proposals
taking effect is uncertain but not expected to be before 2019.
Any changes or modification of IFRS accounting policies may require a change in the future results or a
retrospective adjustment of reported results.
The resolution of several issues affecting the financial services industry could have a negative impact on
Prudential’s reported results or on its relations with current and potential customers
Prudential is, and in the future may be, subject to legal and regulatory actions in the ordinary course of its
business, both in the UK and internationally. These actions could involve a review of types of business sold in the
past under acceptable market practices at the time, such as the requirement in the UK to provide redress to
certain past purchasers of pension and mortgage endowment policies, changes to the tax regime affecting
products, and regulatory reviews on products sold and industry practices, including, in the latter case, lines of
business it has closed.
Regulators’ interest may include the approach that product providers use to select third party distributors and to
monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible
for the deficiencies of third-party distributors.
In the US, there has been significant attention on the different regulatory standards applied to investment advice
delivered to retail customers by different sectors of the industry. As a result of reports relating to perceptions of
industry abuses, there have been numerous regulatory inquiries and proposals for legislative and regulatory
reforms. This includes focus on the suitability of sales of certain products, alternative investments and the
widening of the circumstances under which a person or entity providing investment advice with respect to certain
employee benefit and pension plans would be considered a fiduciary which would subject the person or entity to
certain regulatory requirements. There is a risk that new regulations introduced may have a material adverse
effect on the sales of the products by Prudential and increase Prudential’s exposure to legal risks.
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In Asia, regulatory regimes are developing at different speeds, driven by a combination of global factors and local
considerations. There is a risk that new requirements are introduced that challenge current practices, or are
retrospectively applied to sales made prior to their introduction.
Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and
financial condition
Prudential is, and may be in the future, subject to legal actions, disputes and regulatory investigations in various
contexts, including in the ordinary course of its insurance, investment management and other business
operations. These legal actions, disputes and investigations may relate to aspects of Prudential’s businesses and
operations that are specific to Prudential, or that are common to companies that operate in Prudential’s markets.
Legal actions and disputes may arise under contracts, regulations (including tax) or from a course of conduct
taken by Prudential, and may be class actions. Although Prudential believes that it has adequately provided in all
material aspects for the costs of litigation and regulatory matters, no assurance can be provided that such
provisions are sufficient. Given the large or indeterminate amounts of damages sometimes sought, other
sanctions that might be applicable and the inherent unpredictability of litigation and disputes, it is possible that an
adverse outcome could, from time to time, have an adverse effect on Prudential’s reputation, results of
operations or cash flows.
Prudential’s businesses are conducted in highly competitive environments with developing demographic
trends and continued profitability depends upon management’s ability to respond to these pressures and
trends
The markets for financial services in the UK, US and Asia are highly competitive, with several factors affecting
Prudential’s ability to sell its products and continued profitability, including price and yields offered, financial
strength and ratings, range of product lines and product quality, brand strength and name recognition, investment
management performance, historical bonus levels, developing demographic trends and customer appetite for
certain savings products. In some of its markets, Prudential faces competitors that are larger, have greater
financial resources or a greater market share, offer a broader range of products or have higher bonus rates.
Further, heightened competition for talented and skilled employees and agents with local experience, particularly
in Asia, may limit Prudential’s potential to grow its business as quickly as planned.
In Asia, the Group’s principal competitors in the region are international financial companies, including global life
insurers such as Allianz, AXA, AIA, and Manulife and multinational asset managers such as J.P. Morgan Asset
Management, Schroders, HSBC Global Asset Management and Franklin Templeton. In a number of markets,
local companies have a very significant market presence.
Within the UK, Prudential’s principal competitors include many of the major retail financial services companies
and fund management companies including, in particular, Aviva, Legal & General, Lloyds Banking Group,
Standard Life, Schroders, Invesco Perpetual and Fidelity.
Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund
organisations, banks and other financial services companies such as AIG, AXA Financial Inc., Allianz, Prudential
Financial, Lincoln National, MetLife and Aegon.
Prudential believes competition will intensify across all regions in response to consumer demand, technological
advances, the impact of consolidation, regulatory actions and other factors. Prudential’s ability to generate an
appropriate return depends significantly upon its capacity to anticipate and respond appropriately to these
competitive pressures.
Downgrades in Prudential’s financial strength and credit ratings could significantly impact its
competitive position and damage its relationships with creditors or trading counterparties
Prudential’s financial strength and credit ratings, which are used by the market to measure its ability to meet
policyholder obligations, are an important factor affecting public confidence in Prudential’s products, and as a
result its competitiveness. Downgrades in Prudential’s ratings, as a result of, for example, decreased profitability,
increased costs, increased indebtedness or other concerns, could have an adverse effect on its ability to market
products; retain current policyholders; and on the Group’s financial flexibility. In addition, the interest rates
Prudential pays on its borrowings are affected by its credit ratings, which are in place to measure the Group’s
ability to meet its contractual obligations.
Prudential plc’s long-term senior debt is rated as A2 by Moody’s, A+ by Standard & Poor’s and A by Fitch. These
ratings have a stable outlook.
Prudential plc’s short-term debt is rated as P-1 by Moody’s, A-1 by Standard & Poor’s and F1 by Fitch.
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The Prudential Assurance Company Limited’s financial strength is rated Aa2 (negative outlook) by Moody’s, AA
(stable outlook) by Standard & Poor’s and AA (stable outlook) by Fitch.
Jackson’s financial strength is rated AA by Standard & Poor’s and Fitch, A1 by Moody’s, and A+ by AM Best.
These ratings have a stable outlook.
Prudential Assurance Co. Singapore (Pte) Ltd’s financial strength is rated AA (stable outlook) by Standard &
Poor’s.
In addition, changes in methodologies and criteria used by rating agencies could result in downgrades that do not
reflect changes in the general economic conditions or Prudential’s financial condition.
Adverse experience in the operational risks inherent in Prudential’s business, including failure in
information technology and cyber-security, could disrupt its business functions and have a negative
impact on its results of operations
Operational risks are present in all of Prudential’s businesses, including the risk of direct or indirect loss resulting
from inadequate or failed internal and external processes, systems and human error or from external events.
Prudential’s business is dependent on processing a large number of transactions across numerous and diverse
products, and is subject to a number of different legal and regulatory regimes. Further, because of the long-term
nature of much of the Group’s business, accurate records have to be maintained for significant periods.
These factors, among others, result in significant reliance on and require significant investment in information
technology (IT), compliance and other operational systems, personnel and processes. In addition, Prudential
outsources several operations, including a significant part of its UK back office and customer-facing functions as
well as a number of IT functions, resulting in reliance upon the operational processing performance of its
outsourcing partners.
Although Prudential’s IT, compliance and other operational systems and processes incorporate controls designed
to manage and mitigate the operational risks associated with its activities, there can be no assurance that such
controls will always be effective. Due to human error among other reasons, operational incidents do happen
periodically and no system or process can entirely prevent them although there have not been any material such
events to date. For example, although Prudential has not identified a material failure or breach in relation to its
legacy and other IT systems and processes to date, it has been, and likely will continue to be, subject to
computer viruses, attempts at unauthorised access and cyber-security attacks. Prudential’s legacy and other IT
systems and processes, as with operational systems and processes generally, may be susceptible to failure or
breaches.
Being part of the financial services sector, Prudential and its business partners are increasingly exposed to the
risk that third parties may attempt to disrupt the availability, confidentiality and integrity of its IT systems. This
could result in loss of trust from Prudential’s customers, reputational damage and financial loss. The cybersecurity threat continues to evolve globally in sophistication and potential significance as Prudential increasingly
moves to digitalize its business and provide on-line business operations for its customers. Whilst a focus of
Prudential is on being proactive to the exposure faced from emerging threats through continually reviewing and
enhancing its IT environment to remain robust and secure, together with increasing its ability to detect system
compromise, and recover should such an incident occur, there can be no assurance that such events will not
take place with adverse consequential effects on Prudential’s business and financial position.
Such events could, among other things, harm Prudential’s ability to perform necessary business functions, result
in the loss of confidential or proprietary data (exposing it to potential legal claims and regulatory sanctions) and
damage its relationships with its business partners and customers. Similarly, any weakness in administration
systems (such as those relating to policyholder records or meeting regulatory requirements) or actuarial reserving
processes could have a material adverse effect on its results of operations during the effective period.
Adverse experience relative to the assumptions used in pricing products and reporting business results
could significantly affect Prudential’s results of operations
In common with other life insurers, the profitability of the Group’s businesses depends on a mix of factors
including mortality and morbidity levels and trends, policy surrenders and take-up rates on guarantee features of
products, investment performance and impairments, unit cost of administration and new business acquisition
expense.
Prudential needs to make assumptions about a number of factors in determining the pricing of its products,
setting reserves, for reporting its capital levels and the results of its long-term business operations. For example,
the assumption that Prudential makes about future expected levels of mortality is particularly relevant for its UK
annuity business. In exchange for a premium equal to the capital value of their accumulated pension fund,
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pension annuity policyholders receive a guaranteed payment, usually monthly, for as long as they are alive.
Prudential conducts rigorous research into longevity risk, using data from its substantial annuitant portfolio. As
part of its pension annuity pricing and reserving policy, Prudential’s UK business assumes that current rates of
mortality continuously improve over time at levels based on adjusted data and models from the Continuous
Mortality Investigations (CMI) as published by the Institute and Faculty of Actuaries. Assumptions about future
expected levels of mortality is similarly relevant to the Guaranteed Minimum Withdrawal Benefit (GMWB) of
Jackson’s variable annuity business. If mortality improvement rates significantly exceed the improvement
assumed, Prudential’s results of operations could be adversely affected.
A further example is the assumption that Prudential makes about future expected levels of the rates of early
termination of products by its customers (persistency). This is particularly relevant to its lines of business other
than its UK annuity business, especially Jackson’s portfolio of traditional and variable annuities. Prudential’s
persistency assumptions reflect recent past experience for each relevant line of business. Any expected change
in future persistency is also reflected in the assumption. If actual levels of future persistency are significantly
different than assumed , the Group’s results of operations could be adversely affected. Furthermore, Jackson’s
variable annuity products are sensitive to other types of policyholder behaviour, such as the take-up of its GMWB
product features.
Another example is the impact of epidemics and other effects that cause a large number of deaths. Significant
influenza epidemics have occurred three times in the last century, but the likelihood, timing, or the severity of
future epidemics cannot be predicted. The effectiveness of external parties, including governmental and nongovernmental organisations, in combating the spread and severity of any epidemics could have a material impact
on the Group’s loss experience.
As a holding company, Prudential is dependent upon its subsidiaries to cover operating expenses and
dividend payments
The Group’s insurance and investment management operations are generally conducted through direct and
indirect subsidiaries.
As a holding company, Prudential’s principal sources of funds are remittances from subsidiaries,
shareholder-backed funds, the shareholder transfer from long-term funds and any amounts that may be raised
through the issuance of equity, debt and commercial paper.
Certain of the subsidiaries are restricted by applicable insurance, foreign exchange and tax laws, rules and
regulations that can limit remittances. In some circumstances, this could limit Prudential’s ability to pay dividends
to shareholders or to make available funds held in certain subsidiaries to cover operating expenses of other
members of the Group.
Prudential operates in a number of markets through joint ventures and other arrangements with third
parties (including in China and India), involving certain risks that Prudential does not face with respect to
its consolidated subsidiaries
Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures
(including in China and India). For the Group’s joint venture operations, management control is exercised jointly
with the venture participants. The level of control exercisable by the Group depends on the terms of the joint
venture agreements, in particular, the allocation of control among, and continued co-operation between, the joint
venture participants. Prudential may face financial, reputational and other exposure (including regulatory
censure) in the event that any of its joint venture partners fails to meet its obligations under the joint venture,
encounters financial difficulty, or fails to comply with local or international regulation and standards such as those
pertaining to the prevention of financial crime. In addition, a significant proportion of the Group’s product
distribution is carried out through arrangements with third parties not controlled by Prudential and is dependent
upon continuation of these relationships. A temporary or permanent disruption to these distribution arrangements,
such as through significant deterioration in the reputation, financial position or other circumstances of the third
party or material failure in controls (such as those pertaining to the prevention of financial crime) could adversely
affect the results of operations of Prudential.
Prudential’s Articles of Association contain an exclusive jurisdiction provision
Under Prudential’s Articles of Association, certain legal proceedings may only be brought in the courts of England
and Wales. This applies to legal proceedings by a shareholder (in its capacity as such) against Prudential and/or
its directors and/or its professional service providers. It also applies to legal proceedings between Prudential and
its directors and/or Prudential and Prudential’s professional service providers that arise in connection with legal
proceedings between the shareholder and such professional service provider. This provision could make it
difficult for US and other non-UK shareholders to enforce their shareholder rights.
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Changes in tax legislation may result in adverse tax consequences
Tax rules, including those relating to the insurance industry, and their interpretation, may change, possibly with
retrospective effect, in any of the jurisdictions in which Prudential operates. Significant tax disputes with tax
authorities, and any change in the tax status of any member of the Group or in taxation legislation or its scope or
interpretation could affect Prudential’s financial condition and results of operations.
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